MBIA Inc (MBI)

[lecorb]

Hedge Funds Are Mixed On MBIA

Summary
•Hedge funds are divided on MBIA.
•MBIA trades at a big discount to book value, but there are no near term catalysts.
•MBIA’s Puerto Rican exposure adds uncertainty to the stock.



By Jay Smith

Several hedge funds increased their holdings of MBIA (NYSE:MBI) in the first quarter. George Soros' Soros Fund increased its position by 15% to 1,937,715 shares from January to March 31. Joel Greenblatt's Gotham Asset Management increased its position by 3% to 36,529 shares. Prem Watsa's Fairfax Financial Holdings increased its position by 67% to 50,000 shares. Glenn Dubin's Highbridge Captial Management more than doubled its position by 109% to 36,315 shares. Like hedge funds, an insider, CEO Joseph Brown, also raised his stake. Brown bought 75,000 shares at an average price of $8.98 per share on June 19. Brown's purchase gives him 3,765,772 shares total.

Going the opposite way are several hedge funds that either decreased their position or bought put positions on the MBIA. Kevin Michael Ulrich and Anthony Davis' Anchorage Advisors was one of the put buyers. The fund established a put position worth $41.850 million in the first quarter. Mark Gallogly's Centerbridge Partners was another put buyer, having reported a put position of $21.1 million at the end of March. Several hedge funds reduced their MBIA exposure. D.E. Shaw decreased its position by 48% to 735,145 shares while Ken Griffin's Citadel Investment Group decreased its holdings by 32% to 725,702 shares. Israel Englander's Millennium Management decreased its position by 98% to 18,723 shares too.

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The hedge funds that bought put positions or reduced their long positions made the right choice. MBIA is down 37% year to date, and down 45% in the last 12 months. Because MBIA is a bond insurer, the stock sold off on the news that Puerto Rico might not pay its debts in the future. According to MBIA's 10-Q, MBIA's subsidiary National Public Finance Guarantee Corp had $4.5 billion in gross insured par exposure to Puerto Rico at the end of the first quarter. Of the $4.5 billion of gross insured par exposure, $1.422 billion is exposure to the Puerto Rico Electric Power Authority (PREPA) which analysts don't believe has the financial resources to service its $9 billion in debt. PREPA looked like it was going to default on its $400 million payment this Wednesday, although now it seems that PREPA and its creditors will find a workaround to avoid a default.

Even if a workaround is successful, MBIA's Puerto Rican problem is not going to go away. Puerto Rico simply has too much debt that its ailing economy cannot support. A bailout is unlikely, as the U.S. Federal government has said it will not bail out Puerto Rico. Puerto Rico is unlikely to grow its way out of the debt, as the country has been in a recession for almost a decade. Monetizing debt is also out of the question. Unlike the Federal government, Puerto Rico cannot print money to pay back its creditors. Unless Puerto Rico reaches a comprehensive restructuring with its creditors, Puerto Rico will be a cloud that hangs over MBIA for a while.

With shareholder's equity of $3.9 billion at the end of March 31 and a Standard & Poor's Rating of AA- for National Public Finance Guarantee Corp, MBIA will survive the Puerto Rico crisis unless the crisis spreads to other parts of the bond market outside of Puerto Rico. With a price to book value of 0.28, the bond insurer is arguably one of the cheapest stocks on the market today, but there are no immediate catalysts to send the stock up higher. MBIA needs a favorable Puerto Rico settlement or news of a big buyback for shares to rally higher.

http://seekingalpha.com/article/3299015-hedge-funds-are-mixed-on-mbia